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BUSI1330: Value Chain Course School/Level Management Coursework 1 Assessment Weight AI Ersoy Submission Deadline

BU/UG 50.00% 12/01/2011

Coursework is receipted on the understanding that it is the student's own work and that it has not, in whole or part, been presented elsewhere for assessment. Where material has been used from other sources it has been properly acknowledged in accordance with the University's Regulations regarding Cheating and Plagiarism.

000566488

Galib Akash

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Grade Awarded_________ __ Moderation required: yes/no

Introduction Definition of Inventory Types of Inventory Purpose of inventory Inventory Control Inventory Costs

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Table of contents page 1 page 1 page 1 page 1 page 2 page 2 page 2 page 3 page 3 page 3

Definition of Inventory management Features of Inventory management Benefits of Inventory management Lot-sizing techniques

Conclusion Bibliography

page 4 page 4

Value chain management is a very powerful business tool used for strategic planning of the company. One of the most important analytical component of value chain management is the supply chain management. According to Lambert (2008) supply chain management is the integration of key business processes across the supply chain for the purpose of creating value for the customers and stakeholders. Supply chain management is done by a company to allow it to reduce the costs of both the suppliers and the customers as well as be able to maintain and even improve the quality of the product/service. Inventory management is one of the processes in supply chain management. Inventory is kept in the company in order to meet the demand of the customer as well help the suppliers during inflation. However holding a large amount of inventory can be harmful for the company as keeping an inventory has several costs associated with it. This is why the inventory should be managed efficiently. Inventory is defined as the lists and goods that have been held available in stock by the organization. It can also be the stored quantity of goods that exceeds what is needed by the company at a stated period of time. Inventory can exist in a business in four different states: Raw materials: they are goods required to continue production without any interruption. Work in progress inventory(WIP): Inventory of the partially produced goods. Finished goods: Inventory of the products in the company. Spares: inventory of spare parts and returned goods that were left in the manufacturing site. Inventory has a major impact in the material flow time of the supply chain. Material flow time is the total time a items take to be completely produced. There are several reasons of keeping inventory in a company. The significant purposes are: I. Meeting Demand: Goods must always be present in inventory to prevent from getting lost. If a customers demand is not fulfilled due to shortage of product then the customer might get the product from another source thus causing a back-order. II. Keeping operations running: inventory of WIP must be present in order to have a smooth operation. If shortage of one raw materials or partially formed products occur then the whole cycle gets stopped. This is because during the production of the item each operation is depended on its previous one. Thus inventory between dependent operations helps to decouple the dependency of the operations. III. Lead time: Lead time is the time elapsed between time when order was taken and time when the goods were received. Inventory should be kept in the company because the suppliers cannot always supply goods immediately. The lead time differs from company to company. The greater lead time is, the greater amount of inventory must be kept for smooth running of the operations. For example companies like Nissan and Toyota has almost instant lead time so they usually keep a small inventory. However steel factories and cement factories have a large lead time so they must keep a very large inventory. IV. Hedge: Inventory can be used as a hedge against price increase and inflation. Companies get information about price and inflation from middle men and dealer, thus get excess goods beforehand from the suppliers in order to hedge the situation. V. Quantity discount: Companies are given a discount when large amount of goods are brought at one time. However this is only justified when the discounted amount is actually greater than the holding costs of the goods. VI. Smoothing Requirements: Sometimes in a company, unpredictable size of orders are placed. During those times, inventory helps to smoothen up the demand requirements. In short there are three main reasons of keeping inventory: to save time, to tackle uncertainty and to meet the demands of economies of scale.

Inventory Control is an important concern for all managers as it is primarily about identifying and placing the inventory stock. There are few methods of controlling the inventory:

 ABC: The items in the inventory are classified in three sections. Section A consists of 20% of the goods but costs upto 80% of the total costs.While C has around 50% of the goods which cost only 5%. And B is in the middle with 30% of the goods costing around 15%. By classifying the products this way it help the company to determine how much resources and time is required to take care of each section. Inventory is counted usually using a process known as cycle counting. VED: VED analysis is generally used to classify the requirements and urgency of spare parts inventory. V stands for Vital spare parts which must be present in inventory in order to have a smooth running of the operations. E stands for the essential spare parts which are necessary but still kept in low quantities. D stands for desirable spare parts which sometimes may not be kept as a part of the inventory. FSND: The basis of control for FSND is the usage rate of the items in the inventory thus the items are classified in the following pattern: F- fast moving items, S- slow moving items, Nnormal moving items D- dead items (items used very slowly or not used at all). Control of inventory is required because of the cost associated with inventory. Without proper control cost of inventory may become more than the beneficial outcomes of keeping an inventory. Some of the major costs in keeping an inventory are: Holding Costs: holding costs or carrying costs are the costs associated with maintenance of the inventory. A storage facility is required to keep all the inventory items. A storage facility may be a small room or even a huge warehouse ( usually in steel mills). Also the facility must contain machines like fork lifts and mini trucks to move items from one place to another. Running a storage facility has its own costs including heating, cooling, lighting and security. Opportunity costs like damage of items and loss of items (usually due to theft) can be also added costs. All these make up the holding costs of inventory. Set-up Costs: There are many costs associated with setup costs. Set up is mainly the cost build up during the manufacture of a product from its raw materials. A technician needs to run the machines and he is taking salary which becomes part of the cost. Ordering costs such as purchasing agents salary, telephone bills, office bills all are a part of the set-up costs. Purchase costs: Purchase costs simply is the costs of purchasing the items. If the company purchases a part which is a finished product then the total purchasing cost can be determined by multiplying one purchased unit P with the total number of finished products demanded each year D. Thus purchasing cost is PD. The total cost of having an inventory is therefore: holding costs+ setup costs+ purchase costs. If a graph is plot having holding cost and setup costs as lines on the graph then the point at which the lines intersect shows the lowest total inventory costs. Therefore the quantity Q needed can be found as the point which corresponds to the intersecting lines. This is correct if certain assumptions are kept in mind such as: when one product is involved, there is constant demands, constant costs and no quantity discounts are given. Inventory costs can be lowered by controlling the inventory properly. With the use of dynamic investment management techniques one can measure and control the inventory to run the value chain operations smoothly. Inventory management can be defined as an aim to balance the inventory demands and requirements of the need of minimizing costs resulting from obtaining and keeping inventory. Inventory management is a regulation that uses the several principals and concepts in order to control and manage inventory appropriately. Precise control and safeguarding of inventory is vital for a well established company. Thus comprehensive reports and policies are required. Some of the ideal features of investment management are: Extended pricing: Creating extensive pricing options and policies for each customer thus increasing customer satisfaction. Stock count: Maintaining an accurate stock count schedule an investigating stock irregularities quickly in order to prevent any difference in the items status count and the warehouse presence. Requirements determination: Planning and determining the current and future customers supply requirements. Materials distribution: planning and determining the distribution of supplies and stock-pots. Procurement authorization: preparing recommendations and directives for the purchase of materials and items.

 Funds management: Analyzing the strategies and plans of material requirements to determine the quantities of items required as well as funds required. Some of the benefits of inventory management are: 1.Centralized inventory management consolidates inventory information by tracking lot numbers, on-hand levels and expiration dates, making the reordering process more efficient. 2.Enables simultaneous tracking and documenting supplies during studies to reduce redundant data entry and increase workflow efficiency. 3.When multiple officials are involved in a case, the statistical report accurately correlates the supplies used with the correct user, eliminating mis-charges and appropriately tracking resources. 4.Provides stand-alone inventory management system for the institution with the capacity to integrate with a hospitals existing inventory system, significantly reducing go-live times and improving departmental efficiency. 5.Optional interface to institutions/companys material management system significantly reduces ongoing inventory maintenance, and ensures accurate pricing data for case cost reports and auto-decrements supply levels. 6.Comprehensive inventory reports help automate key administrative responsibilities, such as tracking inventory item usage by vendor and physician, maintaining instock value of consignment verses non-consignment items, and providing notification of items with upcoming expirations. There are also several lot-sizing techniques to keep inventory levels in optimal stage. Some of them are: I. II. Fixed order interval model: Fixed time intervals of weekly or monthly is produced and items are kept in the inventory accordingly to the demand of the time intervals. The inventory level needs to be checked regularly in such techniques. Single period model: This model can only be used in perishable type of products such as food, flowers and daily newspaper. Only small inventory is kept and unused products usually are loss. So this model tries to balance the cost of losing customer goodwill and opportunity costs with the cost of extra inventory( which can not be used again so is a loss). Part period model: this model tries to select the number of periods by the inventory costs that will make total carrying cost almost equal to the setup costs.

III.

Having a beneficial inventory system is vital for both supply chain and value chain management. Storing ideal amount of inventory close to customer through warehouse can improve quality of value chain and develop greater customer satisfaction. On the other hand, if there is excess inventory stored in a warehouse it has excess carrying cost and other cost etc. So maintaining and keeping ideal amount of inventory in a supply chain is significant for building sound value chain management framework.Inventory management can be used in planning and controlling the inventory to keep the inventory in a state that is beneficial for both the company and its customers.

Bilbliography

Investopedia, (n.d.)http://www.investopedia.com/dictionary/[Accessed 03/01/11] J. David Viale, (1996),Inventory management: from warehouse to distribution center, Crisp Publications

John T. Mentzer, (2001), Supply chain management, Sage Publications, Jobfunction (n.d.) http://jobfunctions.bnet.com/Operations/Supply+Chain/Inventory+Management/ [Accessed 04/01/11]

Ki Ling Cheung, Hau L. Lee,( 2002), The Inventory Benet of Shipment Coordination and Stock Rebalancing in a Supply Chain, Vol.48,No.2,February 2002 pp.300306, Available from: http://www.ie.bilkent.edu.tr/~ie572/Papers/CheungandLee.pdf [Accessed 04/01/11]